Buying a business: what to consider

Christopher Niesche

A fast way for a company to grow is to buy another company and get access to its customers and assets. But the strategy is not without risks. If the acquisition is botched, then any benefits can disappear and the business can be left worse off.

Here the experts share their tips for a successful acquisition.

Why buy a business?

John Rickard, chief executive of business broker Barrington Corporate Services, says before a business makes an acquisition the owners have to consider the sort of benefits they would gain from making the purchase.

Advertisement

The benefits can come from access to a larger customer base, or from acquiring a new product line or service to sell to existing customers. There are also economies of scale or synergistic benefits – the cost savings that can arise by putting two businesses together, says Rickard.

Many takeovers fail to bring the hoped-for benefits “because they don't think through why they want to buy it in the first place”, he says.

Due diligence

It's important that businesses making an acquisition aren't just being opportunistic and snapping something up because it happens to come on the market, says Sharon Doyle, managing director of advisory firm InterFinancial. They need to always ensure that any acquisition fits their strategic aims.

“Frequently what we'll see is that people have done all the strategy and they think about why they would do a transaction and they define their criteria and then when they go to the market they're very keen to implement their strategy,” says Doyle. "They'll proceed with the first opportunity that becomes available as opposed to aligning themselves and being quite rigorous on due diligence on their criteria.”

Key man risk

Sometimes most of the critical information that holds a business together can be held by one person, such as the owner or the manager. “If there's no system or process for devolution of that control to someone else in the business that can be very problematic in an acquisition,” says Doyle.

The owner might decide to leave the business once it's been sold, taking the knowledge with them. Alternatively, they might stay and choose not to cede control to the new owners.

Have a plan

Doyle says that business owners and managers often focus on the deal, but don't put enough effort into integrating the new business.

“Most organisations are simply not resourced to effectively implement both an acquisition process and then an integration process,” says Doyle.

Often those people who are responsible for integrating an acquisition have a day job as well, so the process doesn't get the time and attention it needs.

“The reason you're pursing the acquisition in the first place is for the strategic upside, so it's having a plan that actually says how are we going to get that 'plus something' in the transaction.”

Take care of the staff

“Often the employees of the firm being bought out can feel quite disenchanted because they can feel like second-class citizens,” says Kevin Griffin, of Griffin Accountants.

The managers and the administrative staff who helped to create the smaller firm's culture often have to leave the business, because their roles are subsumed by staff of the company doing the takeover, leaving the remaining staff feeling discontented after the familiar faces have left.

“The goodwill that any firm has is all tied to their employees, so that has to be carefully managed,” says Griffin. “You really want to identify who are the key staff that you want to keep.”

Financing

How a deal is financed can be crucial to its success. Taking on too much debt to fund an acquisition can be a drain on cash flow – many businesses have come unstuck by growing too quickly and being unable to service their debt.

Griffin says one way of not taking on debt is to buy a business with shares rather than cash, but the sellers might want a complete exit and insist on cash, particularly if they're not fully convinced the new venture will be a success.

Divestments

John Rickard says when a business is buying another for strategic reasons, it won't necessarily want the parts of that business which don't fit its acquisition strategy, particularly if they're underperforming.

“Very frequently you find the business being acquired has weaknesses and you've got to identify those weaknesses and deal with them, either get rid of them or merge them into the existing business in a way that makes them beneficial,” he says.